Hunton Employment & Labor Law Perspectives : Employment Lawyers & Attorneys : Hunton & Williams Law Firm : Labor Law Legislative Updates

According to the Committee, the witnesses for the hearing will be:

• Seth Harris, the Deputy Secretary of Labor
• Colleen Gardner, the Commissioner of New York State’s DOL
• Frank Battaglino, the Owner of Metro Test and Balance, a contractor in Maryland
• Catherine Ruckelshaus, the Co-Director of the National Employment Law Project
• Gary Uber, the Co-Founder of Family Private Care, a referral service for home health caregivers

Though we do not know what position Mr. Battaglino and Mr. Uber (the two business owners on the panel) will take on the proposed legislation, Mr. Harris, Ms. Gardner, and Ms. Ruckelshaus will likely provide testimony in support of the legislation.  Mr. Harris is the Obama Administration’s representative on the issue, and the Administration has made employee misclassification one of its top employment-related priorities.  Ms. Gardner is currently the Commissioner of New York State’s DOL, an agency that has aggressively pursued employee misclassification enforcement in previous years.  Ms. Ruckelshaus’s employer, the National Employment Law Project, is a national advocacy group for low wage workers that, on June 15, issued a report purporting to measure the fiscal impact of independent contractor misclassification.

The Committee’s decision to hold a hearing on the Employee Misclassification Prevention Act represents a continuation of the Administration’s and Congress’s heightened interest in the independent contractor misclassification issue.  This trend has been discussed in many of our prior posts.  In light of these developments and the likelihood that the Act will garner sufficient votes in both houses of Congress, employers who use independent contractors should promptly conduct an audit of its independent contractors to ensure that they can withstand an investigation by a government agency or a legal challenge by an individual worker.

Many employers believe that including language in a contract stating that a worker is an independent contractor will end the classification inquiry.  The inquiry, however, will extend beyond the contract language since determination as to whether a worker is properly classified as an independent contractor is based on multiple factors.  While written contracts and job titles are certainly important factors to consider when assessing whether an independent contractor has been properly classified, a thorough audit should focus on all the facts and circumstances surrounding the worker’s specific job functions and the relationship between the worker and the company.  Examples of questions that should be asked during an audit include: 

• Does the company have the right to control the means and methods of the work or just the work result?
• How, when and where does the worker perform the work?
• Who provides the equipment?
• To whom does the worker report?
• Does the company have a right to determine which workers can perform the services?
• How is the worker paid?
• How does the worker earn vacation and benefits? 
• Are the services performed by the worker traditionally services that are performed by employees? 

While an employer should always review its job classifications at the outset of a new employment relationship or new job classification, employers should also reexamine such classifications periodically to ensure continued compliance with the various applicable laws.

Employers who violate the notice and/or recordkeeping requirements or misclassify a worker would be subject to a civil penalty of up to $1,100 per worker for a first offense and up to $5,000 per worker for willful or repeated violations.  Employers who misclassify workers and violate the minimum wage and overtime requirements would be subject to treble damages.  The proposed legislation also contains broad anti-retaliation/discrimination provisions.

To enforce the Act’s provisions, the Department of Labor would be directed to perform targeted audits focusing on employers in industries that frequently misclassify employees.  The Department of Labor and Internal Revenue Service would be permitted to refer incidents of misclassification to each other.  The states would be directed to increase their own penalties for worker misclassification, conduct audits for the purpose of identifying employers who misclassify workers, and report the results of the audits to the Department of Labor on a quarterly basis. 

While the EMPA is in the earliest stages of consideration by both houses of Congress, its introduction is significant because it follows introduction of the Taxpayer Responsibility, Accountability, and Consistency Act of 2009 (“TRAC”) (H.R. 3408, S. 2882), which would revise the Revenue Act of 1978’s safe harbor provision (the safe harbor provision allows an employer to treat a worker as a contractor if certain requirements are met), make it more difficult for employers to classify workers as independent contractors, and significantly increase employer penalties in the event of misclassification.  It also follows President Obama’s proposed budget for 2011, which includes significant funding for the U.S. Department of Labor’s Wage and Hour Division to increase the Division’s number of investigators, train investigators to detect misclassification of workers, and focus on industries where misclassification is most prevalent.  In sum, the EMPA serves as a reminder that curtailing employers’ use of independent contractors remains a significant issue in Congress.  Employers who have not yet done so would be well-advised to review their independent contractor relationships and ensure that they are on the up and up before the Department of Labor and/or a corresponding state agency does it for them. 

Although the proposed regulation is unlikely to be limited to independent contractor classifications, this all comes on the heels of renewed DOL efforts to crack down on the misclassification of employees as independent contractors.  During a Live Q&A Session to discuss the new Regulatory Agenda, Nancy Leppink, Deputy Administrator of WHD, was asked whether WHD is concerned that the implementation of rules tightening worker classification enforcement will upset the benefits associated with employing independent contractors.  Ms. Leppink responded by essentially parroting a DOL fact sheet on the proposal, which states that “updating the recordkeeping requirements to promote transparency is expected to encourage greater levels of compliance by employers, to enhance awareness among workers of their status as employees or independent contractors . . . and to facilitate DOL enforcement.”

Some of the issues that DOL will need to consider as it formulates the rule include:

• Whether any industries will be exempted from the classification analysis and enhanced recordkeeping requirements.
• Whether the classification analysis is to be conducted on a position-by-position or a worker-by-worker basis.
• The required content of analysis disclosures to workers and whether each worker will have to be formally notified of his or her FLSA status and how it was determined.
• What the proposed retention requirements for classification analysis will be in light of the Lilly Ledbetter Act.

If the proposed rule is implemented, employers will almost certainly be required to expend substantial amounts of time re-analyzing worker classifications and drafting new documents to comply, ultimately generating a significant amount of paperwork.  DOL plans to issue a formal Notice of Proposed Rulemaking for this rule in August, at which time employers will have an opportunity to submit comments on the proposed rule. Stay tuned for more information in August. In the meantime, employers should examine their current worker classifications to protect and prepare themselves.

Misclassification of employees as independent contractors is expected to cost the Treasury Department over $7 billion in lost payroll tax revenue over the next ten years.  To help make up for this shortfall, the proposed budget includes a joint proposal by the Departments of Labor and Treasury.  The joint proposal, a $25 million initiative, would enhance the ability of both agencies to penalize employers who misclassify their employees and would attempt to eliminate or reduce opportunities under current law for employers to misclassify workers.  The initiative also provides for competitive grants to boost states’ incentives to address the problem, as well as the hiring of 100 new enforcement personnel to target worker misclassification. 

The President’s proposal also is likely to build momentum for legislation, already introduced called the Taxpayer Responsibility, Accountability, and Consistency Act of 2009, that would revise the Revenue Act of 1978’s safe harbor provision (which allows an employer to treat a worker as a contractor if certain requirements are met) to make it more difficult for employers to classify workers as independent contractors for employment tax purposes.  The legislation also would significantly increase employer penalties in the event of misclassification.  In addition, states also are enacting new laws to impose harsher penalties for misclassification.  Colorado, for example, passed a law in 2009 that included penalties of up to $5,000 per employee for the first offense and up to $25,000 per employee for subsequent violations.  Other states have passed similar laws.

In light of these developments, which continue a trend that has been building for the past several years, employers will need to be vigilant to ensure that their independent contractor relationships will pass muster.  Misclassifying an employee as an independent contractor will be a very costly mistake.